Thursday, January 12, 2017

Smart Contracts and Blockchain

Smart contracts are computer protocols that can facilitate, verify or
enforce the negotiation or performance of a contract or make a
contractual clause unnecessary. They usually have a User Interface
and can emulate the logic of contractual clauses. The can execute the
terms of a contract in an automated way. They can make contractual
clauses partially or fully self-executing and self-enforcing.

Usually users need to go to a lawyer or a notary and pay them to get
the document. In case of smart contracts, one has to pay with
cryptocurrency and the smart contract is created. A smart contract do
not only define rules and penalties in an agreement, but also can
enforce them in an automated way. It is usually written as code, that
is placed in a blockchain. At triggering events like an expiration
date etc the contract is executed according to the coded terms.

How is Blockchain used in Smart
Contracts ?

Smart contracts are implemented using blockchain. Once a smart
contract is created, it is placed in a blockchain. It typically works
in the following way:

A user requests a transaction. The transaction can involve
contracts, records or cryptocurrency.

The request is broadcast to a P2P network consisting of computers,
called nodes.

The transaction and the user’s status are verified using known
algorithms.

On successful verification, the verified transaction is added to a
block along with other transactions.

The block is added to the blockchain.

Regulators can use the blockchain to learn about the current
activities in the market. At the same time, the individuals involved
can remain anonymous and maintain privacy.

An Example of using a Smart Contract

Let’s understand the whole concept with a very simple example.

Suppose Adam wants to rent a property from Bob. To do that, Adam
would need to pay using cryptocurrency through blockchain. A smart
contract would be created between Adam and Bob, where the terms will
be written as a code. The smart contract would be placed in the
blockchain.

Bob would then need to provide a digital key by the effective date of
the agreement. On the effective date of the agreement, the
appropriate terms would be executed and Adam would get the property,
while Bob would get the payment. So, even if Bob releases the digital
key before the effective date of the agreement, blockchain will hold
the key and it will get released only the scheduled date. And, if Bob
is unable to release the digital key, Adam would automatically get
refunded. The terms of the smart contract will be automatically
executed and the smart contract will get expired automatically after
the scheduled period.

Advantages of Smart Contracts

There are a number of advantages of using a Smart Contract.

Smart Contracts eliminate the need of any intermediary like a
broker, lawyer etc.

The documents are encrypted in blockchain, which makes it much more
secure. Also, the involved parties can be anonymous and maintain
privacy.

Usually a user has to spend lots of time for paperwork or to
manually process documents. Smart contracts can automate the whole
process, thereby saving time.

As smart contracts eliminate the need of intermediaries, it saves
costs involved in the whole process.

As smart contracts are executed in an automated manner, it helps in
avoiding errors that result from manual execution.

Applications of Smart Contracts

There are many applications of smart contracts.

One can use smart contracts for all sort of situations ranging from
financial derivatives to insurance premiums, breach contracts,
financial derivatives, credit enforcement, legal processes, property
law or even crowd funding agreements.

Smart contracts can be used to facilitate business operations that
usually go through lots of issues resulting from independent
processing and lawsuits and settlement delays.

Smart contracts can be used in contracts involving shares, bonds or
derivatives. It can also facilitate mortgage, which is often manual
and confusing. Smart contracts can automate every aspect of the
transaction including payment processing and signing mortgage
agreements.

Smart contracts can be used in property transfers and can improve
transaction integrity, efficiency and transparency.

Smart contracts can be used in supply chain along with IoT to track
managed assets and products from factories.

Smart contracts can automate insurance claims and speed up
processing, verification and payment.

Smart contracts can also be used in clinical trials and medical
research studies to facilitate many sensitive agreements like
involving cross-institutional data sharing.

Smart contracts can be used in cancer research automating patient
data consent management and incentivizing data sharing.

Smart contracts can also be used in a blockchain protected voting
system to facilitate secure voting and improve voter turnout.

Thus smart contracts can eliminate intermediaries in a contract and
save time, extra costs and increase security in a negotiation. This
was a short introduction to smart contracts. Hope it helped.